Can Kids Join an Investment Club?

by Doug Gerlach

Q. We're thinking about starting a new club and several of the interested people have children who would like to participate. Are there any special recommendations on how to allow for this? The kids have their own allowance, and can do their share of research, and obviously it would be both a great investment (we hope!) and educational opportunity.

A. Investment clubs can be a terrific educational opportunity for young people. There are many family investment clubs that allow children and teens to be members, as well as student investment clubs that are made up entirely of students.

There is one slight obstacle, however: minors are not legally allowed to own securities. Fortunately, this doesn't mean that they can't participate in your club. The Uniform Gifts to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) provide a way for minors to benefit from an investment in stocks, mutual funds, or even an investment club. Both these acts allow you to establish an account in a child's name with you or another adult as custodian.

In your club, the parents would serve as custodians for the accounts of their kids. The children could do research, make presentations, and even "vote" on ballot items (although the custodian legally carries the voting power). Your partnership agreement should include a provision for Custodian Accounts for Minors, referring to which act (UTMA or UGMA) that is in force in your state. Here's the language used by one family investment club that you might use as a guideline (although remember that I'm not an attorney):

Any member in good standing may appoint himself or some other person acceptable to the Club as a Custodian under the Uniform Transfers to Minors Act/Uniform Gifts to Minors Act of (STATE NAME HERE), as amended from time to time, or its successors statutes, as a member of the Club, subject to the limitations in this Article and subject to the other provisions of this Partnership Agreement.

The actual member listed in the club records would be something like "Jane J. Wilson, custodian for Mary Ann Wilson" and use the child's Social Security number.

UGMA and UTMA custodianships operate under state laws, and the age at which the custodianship can be terminated varies from state to state, and is usually 18 or 21. One advantage of custodian accounts is that some or all of the unearned income (such as dividends, interest and capital gains) generated by assets in the account are taxed at the child's lower rate. One last reminder: the laws are fairly clear about how funds in a custodial account can be used, so your members should be aware that monies contributed to the club in custodial accounts are subject to restrictions on their future uses if withdrawn prior to the age of legal termination.

Doug Gerlach is ICLUBcentral's investment club guru, helping clubs and their members to operate more efficiently and more harmoniously. Doug's latest book, Investment Clubs for Dummies is the ultimate guide to starting and running a club, packed with tips and insight about club operations, education and investing. He is the author of several other popular investing books, including The Complete Idiot's Guide to Online Investing and The Armchair Millionaire. Doug was a member of the NAIC Computer Advisory Group's Board of Directors from 1996 to 2004, founded NAIC/BetterInvesting's website in 1995, and has been President of ICLUBcentral, Inc. since 2005.